In the light of increasing speculation about a potential downturn in the property market and house prices, figures from Safe Home Income Plans (SHIP) has revealed the potential value and peace of mind of the “no negative equity guarantee”.
SHIP has analysed the cost of an average lifetime mortgage (using average loan value and average interest rate) against average houses prices projected forward by region at 0% and 2% (the long term average) inflation, and at –2% deflation. SHIP has then used these figures to calculate how long it would take for a property to fall into negative equity.
The figures show that based upon long term average property price inflation of 2% p.a. the average equity release property would take over 30 years for negative equity to impact. Given that the average homeowner takes out an equity release plan at age 70, this means that the guarantee is unlikely to be called upon.
However, with 0% house price inflation, the average falls to 22 years for negative equity to be reached and the guarantee to take effect. And if property prices should deflate by -2%, the average property would take around only 17 years before negative equity would hit – nearly half the time assuming a + 2% house price inflation. In such circumstances, the SHIP no negative equity guarantee is clearly invaluable to many equity release customers and their heirs.
In addition, regional analysis shows considerable variation on these timeframes, with negative equity potentially impacting far sooner in those areas where property values are lower. With house price inflation of 2%, negative equity would impact after only 18 years in Scotland, whereas it would take 35 years for this point to be reached in Greater London (see editors notes for full details). Should property price deflation of –2% be experienced, negative equity would be reached in only 10 years in Scotland and 19 in Greater London.
SHIP chairman Jon King said: “The SHIP no negative equity guarantee is a vital cornerstone of equity release products, providing customers with absolute peace of mind that whatever happens to property prices, their home is protected. There will be no cost to them or their estate if their property experiences negative equity, nor will they lose their right to live there. The guarantee, alongside all of the other SHIP product guidelines , is designed to protect a vulnerable category of consumer making a very important decision about a long term product, and to ensure that their experience of equity release is a happy one.”
